Stock King Moutai, where will the bottom be this time?

Recently, the decline in Moutai's price has become a hot topic in the market, with Moutai's stock price dropping from 1770 to nearly 1500 yuan, a decrease of 14%, hitting a new low for the year.

In the past few years, Moutai has experienced brief periods of price declines, but wholesale prices have quickly recovered in the past, with few instances of a significant drop in stock prices due to secondary market circulation price declines.

However, this time, the market reaction to the price decline is more sensitive, perhaps because in recent years, there have been many examples of "industry giants" being significantly devalued, such as Jiangyou Moutai, Jinlongyu, and Consumer Moutai China Duty Free, making investors increasingly sensitive to overvalued A-share varieties.

Especially against the backdrop of a weak recovery, consumer demand is more difficult to predict, and the growth rate of most consumer goods has slowed compared to before, corresponding to a narrowing safety margin, making funds more inclined towards other high-certainty industries and more stringent in valuing consumer goods.

Now, the Moutai Index only has Guizhou Moutai left with a valuation that has not been significantly cut. The luxury story of national liquor Moutai continues, but will this wholesale price drop lead to the valuation of the stock king Moutai being significantly cut as well?

I. Is Moutai Expensive?

From the perspective of the price-earnings ratio, Moutai has fallen to the lowest range since 2018, currently at around 22 times PE, with the last PE bottoming out at around 19 times PE in 2018.

From 2020 to 2023, Moutai's average PE is around 35 times, reaching over 45 times PE at the peak during the fund-holding market in 2021. In October last year, after Moutai fell below 30 times PE, the PE gradually declined, first dropping to 25 times, and is now approaching 20 times PE.

Looking solely from this perspective, the PE has indeed dropped to a new low since 2018, making it relatively cheaper. However, from another perspective, when the long-term average PE is broken, this indicates that the market's previous concerns about Moutai are gradually being realized, or becoming more apparent, leading to the emergence of expectation gaps, so it is necessary to re-examine whether the subsequent valuation logic can return to the previous 30 times PE valuation, or even consider whether 20 times PE can be the current bottom? Undeniably, in previous years of good macroeconomic conditions, everyone thought Moutai was a money-printing machine, making as much profit as it produced each year, with no worries about sales. It was also hailed as the best business model with strong competitive barriers. As long as Moutai does not raise prices, other high-end liquor brands would not raise prices either, and pricing in the industry would depend on Moutai.

Currently, Feitian Moutai is still selling well, but the consumer base is changing. It is difficult to estimate how much liquor is in the hands of distributors on the market, and how much Moutai the younger generation will consume in the future.

In the past, the market often said that it was just a matter of time before young people grew up and naturally started drinking Moutai. This was related to the drinking culture at the dining table, which was difficult to distinguish before, as liquor has been a long-standing part of Chinese culture.

However, since the outbreak of the pandemic, the macroeconomic situation has worsened, the real estate market has entered a downturn, and land revenues in various regions have been declining. Apart from collectors in the market, everyone can clearly feel that business banquet activities are decreasing, especially with rumors of high-priced liquor bans circulating, leading to a reduction in consumption of high-priced liquor.

It can be said that the formation of the "financial attributes" of Moutai is closely related to the macroeconomy, as downgrading of consumption and changes in consumer demographics are eroding Moutai's premium attributes.

While those hoarding Moutai continue to do so, the largest consumer group of Moutai is reducing their consumption. In addition, with Moutai expanding production, more liquor is being hoarded while the number of buyers is decreasing. This has even led to a recent decline in the wholesale price of Moutai.

When the consumption volume of young people does not increase, coupled with a decrease in the original consumer base, the future logic is changing, and the long-term price of Moutai liquor may also decrease.

Two years ago, Moutai realized the issue with its customer base and started some cross-border collaborations closer to young people, such as ice cream, coffee, chocolate collaborations, etc. However, looking back after 2 years, most young people are not falling for this, as they either cannot afford to consume or do not like to drink liquor, preferring cheaper white spirits or other types of alcohol.

In terms of production capacity, according to Moutai's "14th Five-Year Plan" technological transformation and construction project, with an expected investment of over 15.5 billion yuan and a construction period of 4 years, once completed, it will add 19,800 tons of Moutai liquor production capacity. Market estimates indicate that if one ton of base liquor produces 2000 bottles of Moutai, after full production in 2030, nearly 40 million more bottles of Moutai liquor will be added annually.

Therefore, when structural changes occur, Moutai's primary concern in the future may be a potential supply-demand imbalance, further breaking the bottom line of Moutai's wholesale price.

Especially since Moutai not only sells Feitian Moutai, but also has a 20% series of liquors and 30% of various zodiac liquors. Feitian Moutai serves as the pricing anchor for the Moutai series. When the price of Feitian Moutai continues to drop, it directly affects the sales of other series of liquors. If the price decline is not stopped, the future series of liquors may become a drag on performance.

This can be compared to LV and Hermes bags. When production is too high, it may affect the brand value. However, luxury brands like LV and Hermes raise prices every year, offsetting the impact of production growth on prices. Now, Moutai wants to raise prices every year, but under the vast distributor network, this seems unlikely In other words, the 20-year cycle of debt expansion driven by real estate has come to an end. Corresponding to the peak of Moutai in 2021 is the turning point of the cycle, now entering a period of debt deflation, which also affects Moutai. In terms of financial attributes, many people like to use Moutai and gold as benchmark value-preserving assets.

However, the value-preserving attributes of Moutai and gold are becoming increasingly divergent. From 2021 to the present, Moutai has fallen by 19%, while gold has risen by 23%. Taking into account the impact of the pandemic on consumption, starting from November 2022 after the restrictions were lifted, Moutai has still fallen by 2.5%, while gold has risen by over 40%.

In the past, Moutai's long-term growth rate has outperformed gold, and the price of Feitian Moutai has also followed suit. However, after the launch of the series of liquors and the expansion of production capacity, Moutai has started to undergo changes compared to gold.

II. What happened the last time the financial attributes disappeared?

After the plasticizer crisis in Baijiu, Moutai recorded its historically lowest growth rate. In 2014-2015, Moutai only grew by 3.7% in these two years, with profits increasing by only around 1.9%.

During these two years, Moutai also lost its premium attributes in the secondary market, with the worst impact being that the average ROE from 2014 to 2016 was below 30%. After lying low for 3 years, in 2017, the ROE returned to 29%, and revenue and profits returned to high growth.

Based on the experience of the last time when the "financial attributes" disappeared, Moutai experienced extremely low growth for two years, but returned to high growth after 3 years. It is also because of this experience that the current market view on Moutai is extreme, and it is precisely when the view is extreme that there may be opportunities for misjudgment.

Taking Duan Yongping as an example, he can be said to be one of the most famous Moutai investors. He believes that "Moutai is still Moutai". When Moutai encounters difficulties in selling, it just passively adds a few more years of liquor, which can earn more in the future. Some people believe that this time is a long-term turning point for Moutai, and the price will continue to fall.

In reality, determining whether it is expensive or not does not apply to every investor, because most people are looking at this round of misjudgment in valuation, hoping to enter for a short-term rebound, while long-term investors are in the minority.

Or in other words, at what point would it be worth taking a chance on Moutai? Based on the above, with future production capacity and demand unknown, according to the seller's feedback, currently looking at a PE ratio of 20 times, which means a drop to around 1400 yuan, with a 3% dividend support thereafter. However, it is worth noting that this is just an optimistic expectation, as the price of this commodity is difficult to predict. Even with a 3% dividend as a bottom, after dropping to 1400, the price of the liquor may fall even faster.

From a broader perspective, the current margin of safety is still not clear. This does not mean that Moutai will not grow in the future, nor does it mean that Moutai is not a good company. However, sometimes performance growth does not necessarily mean that the stock price will rise, as seen in Moutai over the past 3 years. If Moutai were to propose a buyback now, it would be one of the better choices to boost confidence